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Calculating Risk: Tools for Tech-Savvy Finance Executives

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No
experienced finance executive has to be convinced of the need to invest in
enterprise risk management—and their conviction isn’t just a reaction to
increased regulatory scrutiny. Especially since the financial meltdown of 2008,
executives appreciate the value of avoiding risks, even the rarely occurring
Black Swans.

But in a
growing economy, risk management encompasses more than just subduing every
material menace. Innovation and exploration invariably involve new risks, the
kind that must be identified and, to any extent possible, mitigated ahead of
time. Skillfully minimizing risk— whether by bypassing it or passing it along
to, say, investors—thereby becomes a path to creating value and sharpening
competitive advantage.

Of
course, that presumes that the company has identified and neutralized the right
risks. Managing risk, especially in a growth environment, requires a subtler
approach than simply barking “no” at every potentially precarious opportunity.
To avoid stagnation, it’s critical to bring a more holistic view to any
strategy-oriented decision making, seeking out areas where the company can
safely take more risk. For many companies, this means soliciting input
concerning key and emerging risks from representatives of a variety of
functions and geographies. Those leaders also need the training, and the tools,
to mitigate risk.

Risk-management
tools enable CFOs to address their top two—and seemingly contradictory—aims:
protecting the business and improving financial performance. Where to start?
Here are three suggestions:

1. Practice cloud control: Increased
agility and improved cost-effectiveness have driven companies into the cloud,
whether building their own private-cloud environments or buying public-cloud
offerings. But the benefits shouldn’t obscure the risks involved in having
sensitive information lodged in an external setting. Make sure, for example,
that rules are enforced about who can access the cloud and what they can access
when—all of which can be automated. In addition, make sure that awareness and
training regarding risk is spread throughout the organization; some companies
link compensation to compliance. Given the abundance of wireless devices, it’s
crucial that employees understand what’s at stake should they have sensitive
data stored on their mobile phones—and leave their devices behind.

2. Build a Security Operations Center (SOP): If Sony can be hacked, so
too can your business—although the email trove is likely to be less scandalous.
And many a company has helped increase its own vulnerability by choosing the
wrong service provider, or failing to read the contract’s small print. As a
result, the most effective option may also be the most resource-intensive one:
hiring a team of in-house analysts who will monitor the company’s network for
suspicious activity, including attempted security breaches. While it may be
costly in the short-term, the long-term benefits of safeguarding sensitive data
can also be enticing. By training your own team, IT security can not only
thwart cyberattacks, but can also help support the company’s growth strategy.

3.
Leverage Predictive Analytics. CFOs
are well aware that there’s untapped potential buried in their companies’ data.
Typically, that has meant sifting through historical information. But recent
advances in technology now make it possible to assemble and analyze huge troves
of data, enabling executives to evaluate various what-if scenarios. Given the
declining cost of processing power and storage, it’s also feasible for
companies to—on their own, or with outside help—construct their own predictive
models. (Some industries, such as financial services, can buy off-the-shelf
software.) Given that most companies are collecting data in their ERP or CRM
systems, the additional investment may be relatively small. The payoff? Armed
with models that use historical and transactional data to measure risks, CFOs
can guide management toward making better choices.